Competition, or the Lack Thereof in Local Fluid Milk Markets: San Francisco, Seattle, Chicago, Miami and Dallas-Forth Worth

Abstract

The prices that consumers pay for fluid milk, and the profit margin that retailers and processors capture, depend on the market structure and price conduct in local market areas. Fluid milk processing plants are located near the cities that they supply, and competition at the retail level for consumer traffic occurs at the city level and within smaller market areas. This study uses Information Resources Inc. (IRI) scanner data to examine farm price trends, retail price trends, the relationship between farm and retail level prices, and the farm-to-retail marketing margin for five U.S. cities. Cotterill and Franklin (2001) analyzed in detail the four New England and New York City IRI markets. In conjunction with that more comprehensive effort this study gives insight on milk pricing throughout the continental United States. Our method is visual and preliminary. We present graphs of supermarket milk prices and the price that processors pay for raw fluid milk, what we call the farm price, for IRI quad-week periods (13 per year) from the period ending 3/3/96 through the period ending 7/16/00. There are 58 observations in total. The supermarket retail prices are IRI averages for all supermarkets in each city market area. In this study the adage, a picture (graph) is worth a thousand words is true. By stating this, we do not mean to declare that further more detailed quantitative analysis of milk pricing in these markets is superfluous. To the contrary, more precise measurement that incorporates changes in the costs of market channel inputs other than milk, analysis of milk prices at the supermarket chain level and at the brand level within each chain is needed to measure market wide effects more precisely and to identify exactly who is, or is not, competing on price in particular markets. Our IRI data base has chain and brand level data, so such research is feasible. In the remaining sections of this paper we examine the pricing conduct for San Francisco, Seattle, Chicago, Miami, and Dallas-Forth Worth respectively. We supplement this IRI data based analysis with the results of a computer search for newspaper stories on milk pricing in these cities. In fact we find the most stories in the three markets where we find non-competitive pricing, and their content buttresses our analysis. Our qualitative analysis indicates that San Francisco may be competitive. Severe competitive problems exist in Seattle and Chicago. Miami price trends are too ambiguous to identify competitive or non-competitive price conduct. Dallas-Fort Worth provides an interesting case of non-competitive pricing that explodes into an all-out price war. These results demonstrate that the noncompetitive pricing that Cotterill and Franklin(2001) document in the New England markets is by no means unique.